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Over a decade ago, the U.S. government took a significant step in supporting retirees by introducing the Qualified Longevity Annuity Contract (QLAC). This initiative was designed to provide longevity insurance on a tax-favored basis, utilizing funds from an IRA or other qualified retirement accounts. The rationale was straightforward: ensuring that all Americans could secure their financial futures as they age. According to the IRS, as the baby boomer generation approaches retirement and life expectancies rise, longevity income annuities play a crucial role in helping individuals plan for a sustainable income during their later years.
Updates from the SECURE 2.0 Act
Recent legislative changes from the SECURE 2.0 Act, passed in December 2022, have further enhanced the QLAC framework. Notably, the maximum investment allowed in a QLAC has been increased to $200,000, with plans to raise this limit to $210,000 by January 2025. Furthermore, the legislation has removed the prior restriction that capped QLAC premiums at 25% of an individual’s retirement account balance. This means that someone with $400,000 in an IRA could potentially increase their QLAC investment from $100,000 to $210,000, significantly boosting their retirement income options.
Understanding QLACs
A QLAC, short for Qualified Longevity Annuity Contract, is typically offered by highly-rated insurance companies. Investors have the option to buy QLACs either as a lump-sum payment or in smaller increments over time from various providers. The arrangement guarantees income for life starting as late as age 85, and payments can extend to cover both spouses or a named beneficiary until the total premium has been distributed. Each spouse has the autonomy to make their own decisions regarding their IRA savings in relation to their QLAC purchases.
Funds from rollover IRAs, 401(k)s, or tax-sheltered annuities can be utilized to fund a QLAC. For instance, a survey from February 2025 indicates that a 62-year-old man can secure $72,000 annually starting at age 85 for a $100,000 investment in a QLAC, while a 70-year-old woman could use $200,000 to achieve an annual income of $81,000 from the same age. These figures reflect a significant rise in payouts over the past few years, enhancing the appeal of QLACs for many retirees.
Tax Advantages of QLACs
QLACs also come with substantial tax benefits. The government aims to lower taxable income for retirees, potentially saving billions annually by encouraging individuals to consider QLAC investments within their existing retirement accounts. By investing in a QLAC, the money earmarked for the annuity is excluded from the required minimum distributions (RMDs) that commence at age 73, thus reducing taxable income during the initial retirement years.
Although QLAC payments are taxed as income once they begin—usually at age 85—there are avenues for minimizing tax liability, such as using funds to cover deductible medical expenses or mortgage interest. For example, the tax savings for a 70-year-old woman could amount to approximately $2,000 annually, accumulating to around $50,000 by age 85, presenting a compelling case for leveraging QLACs.
With over 4 million Americans reaching the age of 65 each year and nearly 20 million family units already eligible for QLACs, the potential for collective tax savings could range from $30 billion to $50 billion annually.
Deployment Strategies for QLACs
When considering a QLAC, various strategies can be employed to maximize its advantages. These strategies include:
- Maximum Deferral: This option involves a single QLAC purchase that defers income payments until age 85, ideal for those focused on tax benefits and long-term security.
- Laddered Income: In this approach, individuals make multiple purchases, allowing for income to begin at differing ages, which effectively increases income over time and addresses inflation risks.
This latter method allows for gradual income increases, with example scenarios showing how a retiree can mitigate inflation risk through step-ups in income as they age.
Market Rates and Retirement Planning
The annuity payouts associated with QLACs can be influenced by prevailing interest rates. Recent analysis shows a widening gap between the industry median rates and the competitive rates offered by some companies. Given this dynamic, incorporating a QLAC into a retirement strategy can lead to significantly better outcomes for retirees aiming to maintain low tax liabilities while securing substantial income during retirement.
Understanding these elements can empower retirees to fully leverage QLACs as part of a comprehensive income strategy. The next article will delve into both anticipated and unexpected benefits of utilizing QLACs as part of retirement planning.
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This article presents insights from a contributing adviser and is intended for informational purposes only. Readers can verify adviser credentials through the SEC or FINRA.
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